Managing your wealth and planning for your retirement is not just about savings and investing your money to build a pool of funds for your golden years. What is often overlooked is the need to protect your wealth so that it does not get depleted by unexpected events.
Health is wealth
Retirement planning goes beyond just planning your finances to provide for your golden years. Looking after your physical health is as important as looking after your financial health. This is because long term illnesses brought on by poor health habits can set you back financially in many ways.
For one, poor health can mean higher insurance premiums, leaving you with less to save and invest. In more extreme cases, it may mean that you won't be able to continue working or you may have difficulties finding a job which will set you back financially and prevent you from achieving your retirement dreams.
However sometimes even if you take the best care of your health, unfortunate and unexpected health-related events can still happen which can deplete your savings significantly unless you have sufficient insurance cover. Being seriously ill is not something many us foresee.
In 2013, the top four causes of death in Singapore were Cancer (30.5 per cent), Pneumonia (18.5 per cent), Heart Disease (15.5 per cent) and Stroke (9 per cent). Those afflicted with any of these ailments may find treatment to be very costly.
For example, according to statistics from Singapore's Ministry of Health, a heart angioplasty – a procedure to enlarge a narrowing in a heart vessel with a stent (assuming no serious complications) can cost as much as $46,000 for a nearly three-day stay in a two-bed ward in a private hospital.
Here are a couple of other examples – treatment for pneumonia with complications can cost as much as $44,000 in a one-bed ward private hospital. Stroke, another major health ailment, can cost as much as $34,000 for a 15-day stay in a single-bed ward in a government hospital.
These figures are just the treatment cost for a one-time stay in a hospital. If more hospitalisation is required, the cost can pile up. Also, bear in mind that many of these ailments require long term health care, which can be costly and set back your retirement plans.
Buying insurance can help
There are at least two types of insurance policies that you can purchase to help offset unforeseen medical events like the ones cited above – a hospitalisation plan and a critical illness plan.
A hospitalisation plan will help cover the cost of hospital stay while critical illness plans can make a significant pay-out when an insured is diagnosed with a major illness.
Other insurance plans that can help to offset the unforeseen are personal accident plans, travel insurance, life insurance and mortgage insurance. Life and mortgage insurance are especially important because the death or permanent disability of a person with a home loan and other liabilities, can leave his or her spouse indebted and set back the latter's own retirement plans.
Another major event that can derail your retirement plan is if you lose your job prematurely because of disability or because you get retrenched.
For the former, there are insurance plans that can help offset the loss of income. Eldershield is an affordable severe disability insurance scheme which provides basic financial protection to those who need long-term care, especially those aged 40 and above.
Eldershield provides a monthly cash payout to help pay the out-of-pocket expenses for the care of a severely-disabled person. Singapore Citizens and Permanent Residents with Medisave accounts are automatically covered under ElderShield at the age of 40 although they can opt out if they choose to.
Your ElderShield premium is determined at the age of entry and does not increase with your age. Premiums are payable annually until you reach the age of 65. You can pay for the premiums using Medisave or cash.
Disability aside, job loss due to retrenchment can also be a major set-back to retirement planning if you have significant expenses to meet each month.
To reduce the pain, make sure that you have an emergency fund set aside - equivalent to at least 3 times your total monthly expenses. This can help meet your expenses temporarily while you look for another job.
Having investments that offer you passive income is something else to consider if it offers you regular income. Investing carefully in stocks, unit trusts and other financial products that can offer you an attractive yield and a regular payout is one way to ease the pain of a job loss.
Poor investment decisions
Making poor investment decisions, resulting in significant financial loss, is something else that could derail your retirement plans.
It is imperative to invest carefully and only in things that you are comfortable with and fully understand.
Avoid concentration risk by diversifying your purchases so that you are not dependent on the outcome of a few investments. Diversification can help to protect your wealth so that you do not suffer a major financial set-back if a few investments you made suffer losses.
Remember that there is a big difference between investing and speculating. When you invest you are taking a calculated risk and adopting a longer term horizon.
Consider dollar cost averaging through a regular investment plan, instead of trying to time markets – it's a good strategy to deal with uncertainty and volatile markets following the financial crises over the last few years.
Don't leave things to chance
The unforeseen can happen and instead of leaving things to chance, it is important to plan for the unexpected.
You can't prepare for everything that could go wrong but you should plan for some major unforeseen eventualities at least.
Also, invest carefully to avoid significant losses – diversify your investments not just across asset classes but also over time to enjoy the benefits of dollar-cost averaging.